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Fiscal Year Corporations and Tax Amnesty

(Article published in the Nov. 14, 2007 issue of Manila Standard Today)  

The corporation as a tool of Estate Planning got a boost recently when Commissioner of Internal Revenue Lilian B. Hefti issued on 05 November Revenue Memorandum Circular (RMC) No. 69-2007.  An RMC is an issuance that publishes pertinent and applicable portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR and other agencies/offices.  In form and as its name suggests, an RMC is a communication from the Commissioner of Internal Revenue to her people in the bureau, essentially apprising them of new developments and how to handle situations arising from them.   

 Theoretically, therefore, RMC No. 69-2007 is a subordinate issuance to Department Order No. 29-07 which was issued by the Department of Finance (DOF) on the authority of Section 15 of R.A. No. 9480, popularly known as the Tax Amnesty Law, that give the DOF the authority to issue rules and regulations implementing the law.  In reality, however, RMC No. 69-2007 is the far more superior guidance to the public both in terms of content and clarity, born as it was of the various fora and dialogues that the tax authorities conducted with the private sector on the law.

 RMC No. 69-2007 is in question-and-answer format and covers a variety of concerns expressed by the tax paying public; space constraints require that, in keeping with the general subject of this column, only the impact of the RMC on the corporations, including those used in estate planning, is dealt with at this time.


           The formation of a corporation is often recommended to estate planners, particularly by those whose assets consist in land or in on-going businesses, as means of avoiding the consequences of the estate owners’ death, such as the inevitable estate tax and the dislocations occasioned by the loss.  The basic theory is that, on account of the separation between the personality of the corporation from that of its owners, putting one’s properties in a corporation not only reduces the amount of assets to be reported as part of the gross estate of the decedent but also insulates the business from the disruptions caused by the death of the owners.

 The corporation, like any other tool of estate planning, has its own set of flexibilities as well as disabilities and a significant one is the ability to choose as its annual accounting period a period of 12 months ending on the last day of any month other than December  (Sec. 52(b), Tax Code).  Such a period is called a “fiscal” year (Sec. 22(Q), Tax Code), while that ending on December 31 is called a calendar year. The flexibility enables the corporate entity to coincide its tax accountabilities with its business cycle, resulting in a more equitable determination of its income tax liability.  Similarly, with a smart of choice of the end of one’s fiscal year, a corporation can time its payment of most of its income tax at a time when it has most cash to pay it with.

 An individual, or an entity taxed like an individual such as an estate or a trust, even if in business, does not have the same flexibility (Sec. 43, Tax Code) and to that extent the corporate form of doing business is more advantageous than a single proprietorship.

 This advantage of choosing a fiscal year for its taxable period was prior to RMC No. 69-2007 in jeopardy of becoming a disadvantage in terms of a corporation in a fiscal year availing itself of the benefits of the tax amnesty law.  R.A. No. 9480 and Secretary Margarito Teves’s Department Order No. 29-07 seemed to have completely overlooked the special situation of fiscal year corporations.

 R.A. No. 9480 requires, in Section 2, a taxpayer availing himself of the  tax amnesty it offers to accompany his notice and tax amnesty return with a statement of assets, liabilities and networth “as of December 31, 2005”  and, under Section 5 imposes the 5% the amnesty tax  “based on his [the taxpayer’s] networth as of December 31, 2005 as declared in the SALN as of said period” and if he had in 2005 previously filed a SALN, the 5% is to be only “based on the resulting increase in networth” only. Typical Teves, Section 6 of Department Order No. 29-07 on the relevant point simply repeated the law, thereby providing no further value-added in understanding how the law intended to treat fiscal year corporations.

 Not surprisingly, corporations on the fiscal year basis in unison asked, “how about us?”  The end of calendar year 2005 is completely irrelevant to a fiscal year taxpayer.  No fiscal year taxpayer files at the end of the calendar year any statement of assets, liabilities and net worth with the Bureau of Internal Revenue.  Bookkeeping regulations require corporations to file their SALNs only when they file their final corporate tax returns.  And since the final corporate tax return is filed not as of the end of the calendar year but as of the time of the end of the fiscal year, none of the fiscal year taxpayers filed any statement of assets, liabilities and net worth on December 31, 2005.

 That being so, the literal interpretation thus will engender a situation where  all fiscal year taxpayers who wish to avail themselves of the benefits of R.A. No. 9480 will have to be treated as those who have not filed any SALN at all and thus are to be taxed on the entire net worth based on the newly filed SALN as of December 31, 2005; but calendar year tax payers, having previously filed their statement of assets, liabilities and networth as required as of the end of the calendar year 2005, will be taxed only on the incremental networth shown in their  SALNs as amended.  That is clearly unwarranted discrimination against fiscal year tax payers who were not required at all to file SALNs at calendar year end.

 The distinction between calendar year and fiscal year taxpayers is obviously not germane to the purpose of R.A. No. 9480.  The purpose of the law is, as its title says, to enhance revenue collection and administration by encouraging taxpayers (and non-taxpayers) through the amnesty to come forward and, by presenting themselves in the open, enable the tax authorities to make  a more accurate data base of taxpayers.  Encouraging calendar taxpayers to come out by offering to pay the amnesty tax of 5% only the increment on their networths and at the same time discouraging fiscal year tax payers with the same tax on the entire net worths, simply is not fair.

 Moreover, the literal application of a SALN as of the end of calendar year 2005 excludes from the seductive allure of tax amnesty the very people whom the law wants to come forward.  Hence, there is a need to make the letter of the law yield to its spirit that giveth it life.

 That patriotic task was for Commissioner Lilian B. Hefti to fulfill.  And in a hefty show of courage and statesmanship, she clarified in RMC No. 69-2007 what is meant by “Taxable Year 2005”.  At the very outset of the RMC, the good commissioner maintained that what was meant was “all taxable years which end on any month of the year 2005, whether fiscal year or calendar year.”

 “This means,” the RMC makes clear, “that for fiscal year basis taxpayers, the Balance Sheet filed as of the end of any month in 2005 except December, which is the taxpayer’s fiscal year end, shall be considered as a Balance Sheet filed as of the end of 2005.”  That balance sheet shall be considered in computing for the increment in networth as reflected in the SALN filed with tax amnesty return.  The 5% amnesty tax is then to be imposed on that increment and not on the entire networth as the literal reading of the law and Teves order suggest.

 This is not the first time that the tax bureaucracy “corrected” the law.  In the Tax Reform Act of 1997’s provisions on the taxation of income from long-term (i.e. more than 5 years in tenor) certificates of deposits, trusts, etc., the increasing tax rate schedule was by the text imposed on the diminishing  “remaining” periods.  That was clearly an error since the purpose of the law was to encourage long term placements.  Thus, in the regulations, “remaining’ was rectified to “holding” periods.

 The most recent, to my knowledge, correction of the law confirms my long-held belief that the crafting of the law is too important an activity to left to lawmakers alone; they need the invaluable help of the faithful but voiceless and very often maligned bureaucracy to keep this country going on even keel.